Does Geopolitical Risk Shape Innovation? Some Interesting Findings from the NBER Using our ICRG Risk Series

“The ICRG is the longest running and most comprehensive database of political risk.”

The line above introduces the use of our ICRG data on how innovation reacts to foreign political risk and its economic consequences.

Specifically, in a model that considers how foreign political shocks can disrupt the supply of foreign inputs, the authors show that greater political risk abroad increases domestic innovation, thereby lowering reliance on risky sourcing countries.

They then combine data on sector-level technology development with time-varying measures of industry-level exposure to foreign political risk and report three sets of empirical findings.

First, sectors and commodities with higher exposure to foreign political risk exhibit significantly greater innovative activity. This finding holds across sectors in the US, across country-sector pairs in a global sample, and across critical minerals that are essential for modern economic activity.

Second, the response of innovation is particularly strong when risk emanates from geopolitical adversaries. This is consistent with our finding that trade restrictions are more likely to emerge between non-allies following a rise in political risk in either country.

Third, directed innovation reduces countries’ reliance on imports from risky foreign markets. In doing so, technological change abroad amplifies the negative effects of domestic political risk on export performance.

There is an upside to geopolitical risk.

Have a look, this latest piece from the NBER: (https://www.nber.org/system/files/working_papers/w33964/w33964.pdf)

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